The power of free cash flows: Relentless & Emerging Cash Machines

In the first part of this series, we studied the importance of free cash flows and how we can classify businesses on the basis of the strength of free cash generation and earnings growth. Let's now see the two most rewarding types of businesses based on these criteria: Relentless Cash Machines: High earnings growth and consistently positive free cash flows These companies sustain high pricing power (and hence high ROCEs) over long periods of time. They also redeploy large parts (typically 40-70 per cent) of their surplus capital back into their business to help grow revenues, profits and free cash flows. Thanks to scale efficiencies and high ROCEs, operating profits of these companies are higher than the amount of capital they need to redeploy into the business to generate growth. Since these companies are alre

This article was originally published on September 29, 2021.